Firing employees can be a minefield of legal issues. Done poorly, it can lead to wrongful termination claims; loss of company property and confidential information; bad publicity and damage to your company’s reputation; and loss of morale and poor performance by other employees. Conversely, if your company has decided it’s time for you to leave, your focus should be on setting yourself up for the best future possible and obtaining fair terms of release – not on the emotions associated with your termination.
This blog provides some tips to both employers and employees on crafting and agreeing to reasonable severance terms. If your company does not already have a severance policy in place, consider creating terms and procedures you can implement and follow in the future.
THE SEVERANCE AGREEMENT
A severance agreement is a legally binding contract between an employer and an employee. It can be used for any terminated employee but is not mandatory. Absent a severance agreement, companies are more likely to be sued by departing employees. A well-drafted severance agreement will detail the employee’s termination; waive the employee’s ability to sue for wrongful termination; and offer reasonable compensation for the party’s agreement to part ways amicably. At a minimum, the agreement should include the following terms.
> Severance Pay
If you are dealing with an employee who has an employment contract, you may have already included the criteria for early termination in that agreement. If not, your company should consider adopting a policy for calculating severance pay, particularly for nonexecutive employees. Consistency of terms may provide for fewer accusations that one employee was offered more or less compensation than another. If your company already has a policy, make sure it’s clear that the policy does not provide terminated employees with a payment “to help with their future job hunt.” The payment is for the release of the employee’s claims. If it is offered to everyone, a court may find the employee’s release of claims fails because you have not offered any separate consideration. It has to be a payment offered in return for consenting to the terms of the severance agreement.
Whatever method you choose to calculate severance pay, it needs to be reasonably large enough to incentivize the employee to take it. While your company may have altruistic goals of providing funds to ease the former employee’s transition, remember the primary goal of the agreement is to avoid frivolous and costly litigation. Frequently, severance pay is based upon some multiple of the employee’s monthly salary. The number of multiples may depend on the seniority of the employee.
> Release of Claims
When drafting your release, ensure it includes not just the company or employer, but all relevant related parties, including corporate parents, subsidiaries, directors, officers, agents, employees, etc. The scope of the “Released Parties” should be as broad as possible. Make sure to use a different defined term for (i) the party agreeing to pay severance, and (ii) the Released Parties. Otherwise, it may be unclear as to who is responsible for making the severance payment.
> Some Claims Cannot Be Released
As you craft your release terms, understand certain claims may not be waived in a release agreement and may violate the law if included in your severance agreement. For example:
>> Fair Labor Standards Act (“FLSA”) claims cannot be waived or settled without approval from the Department of Labor (“DOL”) or a court.
>> Age Discrimination in Employment Act (“ADEA”) may be waived in a release agreement, but the release agreement must comply with all of the requirements of the Older Workers Benefit Protection Act (“OWBPA”).
>> Future claims cannot be waived. Because this is the case, as a matter of practice it is best to have the employee sign the waiver on the last day of work.
> Confidentiality
Agreements not to disclose the existence of a severance agreement are common. Employers may not want the details, particularly in the case of highly compensated employees, to be made public. Employees may prefer that the parties agree to a joint statement to be provided, so they don’t risk disparagement when seeking future employment.
>> Non-solicitation/Non-compete
The enforceability of non-compete clauses for employees is jurisdictionally dependent. Some states look on them with disfavor. Some will not enforce them. As an employer, consider the value of adding a clause that is not enforceable. Non-solicitation agreements and agreements to protect company trade secrets are more readily enforceable in all jurisdictions.
As an employee, you may have agreed to these terms before you commenced employment. The severance agreement may ask you to reaffirm these restrictions.
Both parties should consider the reasonableness of the terms, to increase the chances they will be enforceable.
>> Non-Disparagement
Release Agreements commonly include a “non-disparagement” clause. This clause requires the employee not to disparage the company. Employees often demand the clause be mutual. The value of these is subject to dispute. If an employee has been released for cause (or even has some history of poor behavior that may not have been the cause for her termination but is widely known within the company) this could be an unreasonable request and a potential trap. Likewise, depending upon the employee’s level of responsibility or seniority, consider how valuable a non-disparagement clause is to the company.
>> Benefits
The severance agreement should state in clear language how the employee’s benefits will change upon termination. This includes insurance, healthcare, retirement, and any other applicable benefits.
Takeaway
Properly drafted severance and release agreements provide employers an opportunity to avoid costly litigation, and employees an opportunity to move forward with the next stage of their lives. Contact CASHMAN LAW today for a free consultation to see how we might help in drafting or reviewing your important legal documents.
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